Equitrans Midstream (NYSE: ETRN) is a midstream gas company with a moat-worthy footprint in the Appalachian Basin.On top of that, it offers investors a very attractive 7.93% dividend yield, which is expected to This year’s distributable cash flow covers nearly 3.7 times.
However, its biggest upside catalyst is also its biggest risk: its MVP project has been plagued by cost overruns and regulatory hurdles. Management remains committed to the project and remains confident that it will be completed. If successful, ETRN will be very cheap and should provide huge benefits to shareholders. If it fails, however, the company will suffer a major setback, and long-suffering shareholders could experience further downward pressure. Given the uncertainty here, it’s no surprise that ETRN is arguably the cheapest C-Corp midstream opportunity.
Likewise, Enbridge (NYSE: ENB) also has an impressive array of midstream assets, giving it significant scale and diversification in the oil and gas sector, ultimately making it an integral part of the North American energy industry.
Unlike ETRN, however, ENB has a much lower upside and downside profile as its cash flow profile is much more stable and its growth projects are less important than ETRN relative to its existing assets. Given its strong industry position and elite dividend growth stock status, its dividend payout has grown for 27 consecutive years, so it’s no surprise that it’s the most expensive C-Corp midstream opportunity out there.
In this article, we take a closer look at these two midstream companies and share why we now view ENB as a hold and ETRN as a speculative Strong Buy.
ETRN has high-quality collection, transmission, and water supply infrastructure in the region and is actually one of the largest natural gas collection stations in the United States. In addition, it benefits from a symbiotic relationship with EQT Corporation (EQT), which brings significant capital and operational efficiencies, including economies of scale for gathering and processing assets in the Appalachian Basin.
More than half of its current revenue comes from fixed-fee or payment contracts, and the average term for its collection of assets is 14 years, and its average term for transmission and storage of assets is 13 years. Therefore, its current cash flow position is very stable. If/when the MVP is completed and put into use, its revenue from flat-fee or payment contracts should soar to over 70%.
Meanwhile, ENB has a more impressive asset profile. It has the largest network of crude oil pipelines in North America, through which 25% of the crude oil consumed on the African continent is transported. The company also has an increasingly meaningful portfolio of renewable power generation, which it plans to expand over the next few years as part of its energy transition efforts.
In addition to its oil and renewable energy portfolio, ENB is also a major natural gas company. It has the second longest natural gas pipeline network in the United States, through which 20% of the natural gas in the United States is transported. It also has the characteristics of being the largest natural gas distributor on the African continent.
The result of all this is that ENB not only has huge economies of scale and a well-diversified infrastructure, but also generates extremely stable cash flow. 98% of its cash flow is backed by take-or-pay, fee or hedging contracts, and 95% of its clients are investment grade or equivalent.
While ETRN has a solid midstream portfolio, ENB clearly has a superior collective asset portfolio.
While MVP cost overruns will certainly strain the balance sheet and force the company to cut its dividend, the company is currently generating higher-than-dividend free cash flow to pay down debt and has more than $2 billion in available liquidity on its revolver Wire. As such, it should be in a solid financial position for the foreseeable future.
However, ENB is again in better shape, with an industry-leading BBB+ credit rating, still on track to deliver adjusted EBITDA below 4.7x net debt, and has ample liquidity.
ETRN’s 7.93% dividend yield is 199 basis points higher than ENB’s 5.92% dividend yield. ETRN’s 3.7x dividend coverage is also significantly better than ENB, although ENB’s dividend coverage is still fairly conservative at 1.56x.
Given its very stable cash flow profile and stronger balance sheet relative to ETRN, ENB’s dividend safety profile is further strengthened. On top of that, ENB recently achieved 27 consecutive years of dividend growth, while ETRN had no dividend increase, actually cut it, and had to cut it significantly in 2020:
So we actually think ENB’s dividend is safer than ETRN’s. In terms of dividend growth, ENB may have better dividend growth in the near term, but if ETRN can successfully complete its MVP project, its dividend payout could have a lot of upside.
Similar to the outlook for their respective dividend growth profiles, ETRN’s overall cash flow growth profile is heavily dependent on MVP results. If successful, it will boost EBITDA by 30% (annual incremental adjusted EBITDA of $315 million), making it a terrific midstream growth investment. But if the project doesn’t materialize, growth could dry up as the company will have to use its retained cash flow to pay down debt to resize its balance sheet.
At the same time, ENB’s growth prospects are very promising, with substantial capital and investment growth and M&A opportunities. Management has guided for a CAGR of 5-7% per share through 2024, which we believe is achievable.
Given ETRN’s heavy reliance on the results of MVP projects, it’s clearly a riskier bet right now.
In addition to this significant risk, both companies face common operational risks that come with running pipelines and other midstream infrastructure. Given that ENB is a larger player and has participation in both Canada and the US, it may be at greater risk of encountering regulatory or political issues than ETRN (except for MVP projects).
A final consideration when comparing risk factors is the exchange rate impact between the Canadian dollar and the U.S. dollar. ENB – being a Canadian company – declares dividends in Canadian dollars, while ETRN declares dividends in US dollars.
However, given that ENB’s cash flow comes from more diverse sources, its balance sheet is stronger, and its contractual terms and counterparties are stronger than ETRN, ENB is definitely less risky.
Valuation is the only thing that really sets ETRN apart relative to ENB. In addition to the 199bps higher dividend yield, ETRN’s EV/EBITDA multiple is 2.78x lower, and its DCF multiple is only 3.44x compared to ENB’s 8.29x.
It’s hard to compare the two stocks, as ETRN is very cheap and has a much higher yield than ENB, but there’s also considerable risk between its less solid balance sheet and the uncertain prospects for its massive MVP project. At the same time, ENB generates cash flow equivalents and has very stable growth prospects with decent yields. That said, its valuation multiple makes it seem a little stretched at the moment.
ETRN is a strong buy here for investors looking to hit a home run in the midstream segment and are optimistic/believing management’s chances of ETRN completing the MVP and going live relatively close to the current timeline and cost estimates. However, we would caution investors that this is still a speculative investment, and failure to commit to MVP at a reasonable cost and timeline could result in additional dividend cuts.
Meanwhile, ENB looks like a safe haven amid the current macroeconomic and geopolitical storm, but the valuation isn’t very attractive. As such, we rate it a hold, but it’s a worthwhile portfolio to hold for conservative dividend growth investors.